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High-Frequency Trading

High-frequency trading (HFT) has become a catch-all term for any type of …

High-frequency trading (HFT) has become a catch-all term for any type of securities trading where computers carry out trades at lightning-fast speeds. The name conjures images of complex artificial intelligences that try to outsmart and out-trade one another, and in a very small minority of cases there's an element of that. But most HFT strategies are fairly simple, operate on the sell side of the market, and are focused on the mechanics of efficiently routing and cheaply executing orders that are generated by a buy-side customer (human or machine).

One type of HFT strategy is called "iceberging," and means hiding a very large buy or sell order from the market by breaking it up into smaller pieces and doling it out to different exchanges or dark pools. The idea is to keep other market participants from detecting that there's a large order in the process of being executed, and thereby trading against it. Other types of "predatory" algos exist solely to detect these iceberging HFTs and trade against them for profit.

There are some HFT strategies that work on the buy side, and essentially act as robotic day-traders. Momentum strategies are particularly amenable to the HFT treatment, and we've heard that some statistical arbitrage strategies work at very high time frequencies, as well.